exam b ief with Economics 1. End of the bailout The bailout which was agreed in Decem- ber 2010 is due to finish towards the end of the year. There is still some debate about whether the State will be able to return to the international bond markets and start borrowing again. The National Treasury Management Agency, which sells bonds on behalf of the State, has begun selling small quantities of bonds to test the markets but the really big test will come when the bail- out ends. Any sign that the euro crisis could return is likely to make it much more dif- ficult, and much more expensive, for Ireland to resume borrowing. At the moment, things are looking good. The yield - the interest rate which the bonds earn - is lower than it was before the crisis began. While this is good news, Irish yields are still much higher than other countries such as Germany which can almost borrow for free. Yields in many countries are now so low that many investors are looking else- where to invest money - leading some ana- lysts to talk of a “great rotation” away from bonds and back towards shares. 2. Debate on austerity Economists are divided on the wisdom of austerity. As many countries in Europe, in- cluding major economies such as Italy, Spain and the UK return to recession, some econo- mists say that austerity is clearly not work- ing. Economists such as Nobel prize win- ning economist Paul Krugman argues that after five years of scrimping and saving by governments around the world, things are only getting worse. Prof Krugman believes that countries which can borrow money should do this to inflate demand and em- ployment. The International Monetary Fund also makes this argument from time to time. Their opponents disagree and argue that the present financial crisis was caused by too much borrowing and further borrowing is no solution. While their arguments reflect conventional economic thinking, there is little doubt that austerity has been slow to heal broken economies while some countries such as Greece appear to be in a death spiral despite debt write-offs and harsh austerity. 3. House prices Ireland has endured one of the worst hous- ing price crashes ever recorded in history with official figures putting the declines since 2007 at around 60pc. These figures suggest the cost of a home is back to levels last seen in the beginning of the 2000s but some analysts believe prices are even lower. While official figures capture prices paid using a mortgage, they struggle to capture houses bought for cash. As these are often cheaper houses, prices may have fallen even further than the 60pc declines captured by the official figures. The latest evidence from the Central Statistics Office suggests prices have begun to rise again in some parts of the country where there is a shortage of supply while continuing to fall in other parts of the country. The phenomenon of rising prices in the capital and falling prices elsewhere reflect long-term changes in living styles around the world as people continue to move to cities for work. 4. Construction Sector Collapse While many parts of the economy have shown signs of revival, the construction sector remains in deep trouble. A survey which measures activity in the sector shows employment in the sector has declined every month since May 2007. Still, the rate of decline has started to ease recently. The survey suggests that the housing sector may even be close to picking up again as short-
Transcript
exam b iefexam b iefexam b iefexam b iefexam b iefexam b iefexam b ief withEconomics
1. End of the bailout The bailout which was agreed in Decem-ber 2010 is due to fi nish towards the end of the year. There is still some debate about whether the State will be able to return to the international bond markets and start borrowing again. The National Treasury Management Agency, which sells bonds on behalf of the State, has begun selling small quantities of bonds to test the markets but the really big test will come when the bail-out ends. Any sign that the euro crisis could return is likely to make it much more dif-fi cult, and much more expensive, for Ireland to resume borrowing.At the moment, things are looking good. The yield - the interest rate which the bonds earn - is lower than it was before the crisis began. While this is good news, Irish yields are still much higher than other countries such as Germany which can almost borrow for free. Yields in many countries are now so low that many investors are looking else-where to invest money - leading some ana-lysts to talk of a “great rotation” away from bonds and back towards shares.
2. Debate on austerity
Economists are divided on the wisdom of austerity. As many countries in Europe, in-cluding major economies such as Italy, Spain and the UK return to recession, some econo-mists say that austerity is clearly not work-ing. Economists such as Nobel prize win-ning economist Paul Krugman argues that after fi ve years of scrimping and saving by governments around the world, things are only getting worse. Prof Krugman believes that countries which can borrow money should do this to infl ate demand and em-ployment. The International Monetary Fund also makes this argument from time to time. Their opponents disagree and argue that the
present fi nancial crisis was caused by too much borrowing and further borrowing is no solution. While their arguments refl ect conventional economic thinking, there is little doubt that austerity has been slow to heal broken economies while some countries such as Greece appear to be in a death spiral despite debt write-offs and harsh austerity.
3. House prices
Ireland has endured one of the worst hous-ing price crashes ever recorded in history with offi cial fi gures putting the declines since 2007 at around 60pc. These fi gures suggest the cost of a home is back to levels last seen in the beginning of the 2000s but some analysts believe prices are even lower. While offi cial fi gures capture prices paid using a mortgage, they struggle to capture houses bought for cash. As these are often cheaper houses, prices may have fallen even further than the 60pc declines captured by the offi cial fi gures. The latest evidence from the Central Statistics Offi ce suggests prices have begun to rise again in some parts of the country where there is a shortage of supply while continuing to fall in other parts of the country. The phenomenon of rising prices in the capital and falling prices elsewhere refl ect long-term changes in living styles around the world as people continue to move to cities for work.
4. Construction Sector Collapse While many parts of the economy have shown signs of revival, the construction sector remains in deep trouble. A survey which measures activity in the sector shows employment in the sector has declined every month since May 2007. Still, the rate of decline has started to ease recently. The survey suggests that the housing sector may even be close to picking up again as short-
exam b iefexam b iefexam b iefexam b iefexam b iefexam b iefexam b ief withEconomics
ages of houses in some parts of Dublin and other big cities emerge. While it may seem strange to talk about housing shortages with so many ghost estates in every country, badly designed incentives during the boom meant that houses were often built in the wrong places rather than being built in our cities. In Dublin too many apartments and not enough family houses were built during the boom. 5. Stockmarket bounce The stock market collapsed when the econo-my stalled in 2007 but it has recently staged an extraordinary comeback. The ISEQ Overall Index, which contains most of the big companies listed on the Dublin stock exchange, is up around 9pc since the begin-ning of the year and about 18pc since this time last year. Shares are now at their high-est levels in more than four years, suggest-ing that investors are confi dent in Ireland’s prospects for now. 6. Exchequer fi gures Last year was the fi rst time since the crash that the government’s estimates for spending and taxation came in roughly in line with expectations. In previous years, spending continued to rise while revenue from taxes fell more heavily than expected. This lead to an exchequer defi cit that was far worse than forecast. Things began to improve in 2012 for several reasons. The government was less ambitious than in the past. The introduction of the Universal Social Charge brought in extra revenue and government departments outside of health and social protection curbed spending. Indirect taxes have also risen with VAT going from 21pc to 23pc. The good news is that the country is on track to meet targets to reduce the gap between spending and income to 3pc by 2015. Last
year, the gap was around 8pc – less than the offi cial target of 8.5pc agreed with the troika. 7. Bank lending Lack of bank lending, is having a negative effect on the Irish economy but nobody is quite sure about who is to blame. The fail-ure to lend is not disputed but the question of who is to blame remains a hotly debated topic. The banks, the government and en-trepreneurs all have different stories to tell. The banks claim that the economic down-turn means nobody wants to borrow. They also say they have to cling onto their money to keep the ratio between borrowing and lending within legal limits. The government and the Central Bank say the banks should lend more but remain cautious about set-ting limits beyond a general demand that both Bank of Ireland and Allied Irish Banks lend €3.5bn each every year to business and farmers. Central Bank governor Patrick Honohan has also complained the banks lack the expertise to lend because they were so focussed on property during the boom. Business leaders complain that banks are simply not lending and most of the money in going to renew old loans rather than help-ing new companies. 8. Unemployment Unemployment is around 14.2% of the la-bour force or the same sort of level it was at in early 2012. The problem is becoming entrenched here and in the rest of Europe. Most forecasters see Irish unemployment staying at these levels for at least two or three years. Long-term unemployment is becoming a real problem with more than half the work force now classifi ed as long-term unemployed. We are also seeing a fall in the number of people in the work force as workers become “discouraged” and simply
exam b iefexam b iefexam b iefexam b iefexam b iefexam b iefexam b ief withEconomics
give up looking. Some become students or home makers. These people do not appear in the statistics but their absence from the working world means the economy grows more slowly. Unemployment would be much worse here if people were not emigrating in record numbers. 9. Euro rise against sterling The rise in the value of the euro against the UK pound is creating headaches for Irish exporters. As the euro strengthens, Irish exports sold in Britain become less competi-tive. The Irish Exporters Association calcu-lates that a 5pc rise in the value of the euro against the pound over a year costs Irish business €1.5bn in exports. Sterling is fall-ing against the euro for all sorts of reasons but the main one is the so-called currency war between the world’s major powers. Most countries are quietly devaluing their curren-cies to boost exports. The European Central Bank doesn’t like devaluation because it cre-ates infl ation so the euro remains strong.
10. Improved Credit Rating
Ireland’s credit rating has improved sightly over the past year as the risk of default ap-pears to recede. Two of the world’s three biggest rating agencies no longer rate Irish government bonds as non-investment grade, while the third rating agency, Moody’s, is said to be considering an upgrade. While this is good news, Irish bonds are still rated very poorly compared to other countries. Just four years ago, the Irish state had triple AAA status which is the highest rating in the world. Now, even the UK has lost the much valued triple AAA status while one rating agency has even warned that the US may lose its rating. Bond ratings are important because a good rating reduces the cost of borrowing and Ireland is expected to return to the bond markets in force towards the end of the year to replace the present bor-rowing from the troika.
- Thomas Molloy, Acting Business Editor, Irish Independent
The Ghost Estate Glenatore
exam b iefexam b iefexam b iefexam b iefexam b iefexam b iefexam b ief withEconomics
ISEQ PERFORMANCE 2012-2013
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In 2010 the Croke Park Agreement covering the period 2010-2014 was reached between the then government and unions represent-ing workers in the state sector. It was so called because the talks were held in meeting rooms in the Croke Park stadium. Under the Agreement public servants and their manag-ers gave a commitment to change the way in which the Public Service operates so that both its cost and the number of people work-ing in the Public Service could fall signifi -cantly, while continuing to meet the need for services.
In return for this the Government gave certain commitments to serving public servants:• no further reductions in their pay rates,
other than those applied in 2009 and 2010;• no compulsory redundancies as long as
public servants were fl exible about rede-ployment;
• a review of the position on public ser-vice pay in the Spring of each year of the Agreement.
The deal has been criticised over the past two years for being out of step with the private sector where many jobs were being lost and pay rates were falling. The deal was criticised for failing to deliver enough savings and for the slow pace of change in the way in which the public service operates. This year, a year before the Agreement was due to run out, the government negotiated a second Croke Park Agreement with the public service unions. This was necessary because to meet our re-ducing budget defi cit target under the bailout programme the state needed to shave a fur-ther €1bn off the €13bn public sector pay bill. After weeks of talks, a deal was reached last week cutting pay for middle and higher paid public servants and increasing working hours for most public servants. Many public sec-tor workers are unhappy and it is still unclear whether Croke Park 2 will be accepted in all parts of the public service.
Croke Park Agreements2000 103,0442001 117,1122002 122,6302003 117,1722004 125,1992005 132,526
